Brexit Views 10 July 2018

What a difference a day makes.

Following Cabinet sign-off on the UK Government’s new Brexit position last Friday, in the space of 24 hours from Sunday night, Prime Minister Theresa May lost two Secretaries of State, a Junior Minister and two Parliamentary Private Secretaries (PPS) from her Government.

The Brexit Secretary, David Davis was the first to resign late on Sunday night with a letter criticising the Government’s latest Brexit position and stating that he felt unable to be the face of a negotiating position he doesn’t believe in. He was followed shortly by Junior Brexit Minister and former Chair of the Tory Eurosceptic, European Research Group (ERG) Steve Baker, who in his letter said that he is unable to support this policy with the “sincerity and resolve” that is necessary.

Speculation began to circulate early yesterday afternoon around Foreign Secretary Boris Johnson’s position after he failed to turn up at a Western Balkan summit that he was scheduled to host. Confirmation came at around 3pm that the Foreign Secretary was resigning and in his resignation letter he stated that despite agreeing with the Government’s position on Friday, he could not support a plan that would see Britain with the “status of a colony” in its relationship with the EU post-Brexit.  Later that evening the PPS in the Department of Transport, Chris Green MP resigned, followed shortly by Boris Johnson’s PPS, Conor Burns MP.

Following these resignations, Brexiteer and Housing Minister Dominic Raab was named as David Davis’ replacement in DExEU, while Health Secretary and Remain voter Jeremy Hunt will take over from Boris Johnson in the Foreign Office.

The reason behind this turmoil is the Government’s move towards a softer version of Brexit than that envisaged by the hard-line Brexiteers within the Tory Party. On Friday, at her country residence of Chequers, Prime Minister May met with her full Cabinet to set out and get sign off on the terms of the UK’s future relationship with the EU after its departure next March. A three page statement released after the meeting provided the first insight into the new position with further details expected this Thursday when the Government publishes its White Paper on the subject.

Key points within the statement include:

  • The UK will seek to establish a Free Trade Area for Goods with the EU, which it feels if adopted could meet the commitments made by the UK and the EU on the Irish border. To achieve this, the UK will:
    • maintain alignment with EU regulations and standards through a “common rule book for all goods including agri-food” under which the UK will commit to adopting future EU rules necessary to ensuring frictionless trade at the borders;
    • maintain a level playing field with the EU through alignment on state aid rules, cooperation between regulators on competition and continuation of current standards for the environment, climate change, social and employment, and consumer protection; 
    • establish a joint institutional framework with the EU to oversee the application of the Agreement and provide dispute resolution with regard paid to EU case law in areas covered by the common rule book;
    • the introduction of a new “Facilitated Customs Arrangement” that would see the UK apply the UK’s tariffs and trade policy for goods intended for the UK, and the EU’s tariffs and trade policy for goods intended for the EU.
  • The statement does not address the “backstop” solution for Northern Ireland; it does include a commitment that a legal framework for the backstop will be included in the Withdrawal Agreement.
  • While the UK wishes to maintain a common rulebook for goods, it will seek to diverge in regulations governing Services and acknowledges that this will impact on the UK’s current access to the EU market in these sectors.
  • The UK will leave both the Common Agricultural and Fisheries Policies.
  • The UK will pursue its own independent trade policy and will seek accession to the Trans-Pacific Partnership (TPP).
  • The UK will end the free movement of people from the EU although it hopes to establish a mobility framework to govern the ability of EU citizens to travel, study and work in the UK.
  • Finally, the UK has committed to step up its preparations for a “no deal” Brexit.

Although we wait until Thursday to find out the full detail of UK’s new position, there are indicators within Friday’s release that should be welcomed.

The recognition that regulations as well as customs will play a key role in addressing the border on the island of Ireland is a much needed step towards finding a solution for this issue. The British Irish Chamber has long championed continued regulatory alignment, not only as part of the border solution but also to ensure complex supply chains and just in time delivery models can be maintained.

It is also welcome that the UK is putting forward serious proposals for an independent dispute resolution mechanism that will have oversight of any future treaty that is agreed.

We do however have some concerns about what is being proposed and the chances of it being accepted by the EU.

One such concern is how a “Facilitated Customs Arrangement” would address potential smuggling, most notably across the Irish border. As long as the UK is free to negotiate its own trade deals (as it is stating it will) this will be a risk. Should the UK set its tariffs lower than the EU, then what controls will be in place to prevent exporters paying the lower tariff on arrival at UK ports etc. and then surreptitiously moving goods into the EU Single Market without paying the higher tariff? Also, would the EU allow a third state to collect tariffs on its behalf without supervision from EU authorities and the ECJ – previously the clear answer from the EU on this matter has been no.

Our second major concern centres on Services and the UK’s wish to diverge from the EU in this very broad, valuable and complicated area. A paper published by the ESRI last week found that EU membership has increased trade in all services by around 26% between member states. Particular sectors that have benefited from EU membership include financial and business services, computer services and audio-visual services.

A Free Trade Agreement on Services will not be as comprehensive as the UK’s current position and, as the UK Government points out, service firms will lose access to the EU market. It is also still unknown what the UK is proposing in relation to those services connected with the trade of goods e.g. the right of an EU haulier to deliver goods into the UK; the ability for a business to provide customer support for a good delivered from outside the UK; or the right of an EU firm to establish in the UK in order to produce goods and provide services locally. All of this matters if we want to ensure the free trade of goods and services continues beyond Brexit.

As is often stated, Services make up around 80% of the UK’s economy (and the greater part of Ireland’s economy) and the EU is the UK’s most important trading partner in this area. While divergence in regulations for Services may not have the same physical impact in terms of borders as divergence in goods trade might, it would have a serious economic impact. Trade in services is far more complicated than that in goods. With services it is not what tariff do you pay, but rather can you access the market at all and if so, under what conditions? And it’s not just about UK services firms trading into the EU; numerous Irish services businesses will now equally worry about access to the UK market.

We await with baited breath to see what is published in the White Paper later this week. Friday marked an important step forward in the Brexit process and businesses will welcome finally having some clarity on what the UK Government hopes to achieve from Brexit. Domestically, it also seems that the Prime Minister’s position is safe for the time being after a meeting with the Parliamentary Party yesterday did not result in a confidence vote as was expected.

The last few days have focused on the future relationship. However, we must not forget that a “backstop” arrangement for Northern Ireland is still to be agreed if we are to have any hope of delivering on any future model for trade between the UK and the EU.

With only six working weeks left before a Withdrawal Treaty needs to be finalised, there is still a huge amount of work to be done if we are to ensure a deal can be finalised. It is now incumbent on all concerned to step up to the challenge and to reach a deal that ensures we don’t walk off a cliff come the end of March next year.